Weekly Financial - October 21st

23 Octombrie 2010

BANCA COMERCIALĂ ROMÂNĂ S.A.

 

News

Government to face no confidence vote next week

Romania's coalition government will face a motion of censure next week over austerity measures backed by the International Monetary Fund, the head of social-democrats said on Monday. The right-centre government is struggling to implement economic reforms in the publics sector which is part of the EUR 20bn IMF stand-by agreement amid falling popularity following the implementation of tough but necessary austerity measures. Boc Cabinet survived by a wafer-thin margin in June when opposition introduced another motion while a number of MPs from the coalition voted along with the social-democrats and liberals.

The opposition is around 23 votes short of a majority of 236 seats required to topple Boc's government but political analysts say Victor Ponta could manage to lure deputies without party affiliation to reach the needed threshold. However, neither the social-democrats nor the liberals seem too eager to come to power especially under the present austerity circumstances preferring just to capitalize on popularity for the next parliamentary elections in 2012. IMF stand-by agreement is an anchor for Romania in terms of public reforms and despite their being vocal in the criticism of the IMF, most certainly both social-democrats and liberals realize that restructuring public expenditures is the only way towards achieving medium and long-term fiscal consolidation.

Talks between Romanian authorities and IMF on another agreement

An IMF team arrived in Bucharest for another review of the current 24-month stand-by arrangement and for preliminary discussions about future cooperation. Romania met most of the performance criteria for September, but lags behind in terms of implementing some structural reforms and the reduction of the stock of domestic arrears. Romania's representative to the IMF said that a new loan is not needed and the country should improve its capacity to tap local and global capital markets in the future. However, an anchor of credibility is crucial to reduce the cost of private loans and a future agreement with the Fund could do an excellent job in this respect. The IMF official also said that a cut in flat income tax is not a solution to Romania's economic problems at present. This comes after the emergence of rumors in the media about the intention of the government to propose a 4pp cut in the flat income tax rate to 12%, a reduction in social contributions and an increase in the minimum wage. In this scenario, the budget deficit for 2011 would increase to 4.8% of GDP (as compared to a baseline projection of 4.4%) and the government is determined to cover the additional fiscal gap by further cutting capital investments.

This week, the Parliament voted on a cut in VAT for basic food products to 5%, following a proposal from opposition parties. The standard quota remains 24%. Another initiative voted on by the Parliament is the exemption from taxation of pensions below RON 2,000 / month. It is highly uncertain whether the IMF is okay with these changes in the fiscal system and preliminary information shows that even some members of the ruling coalition disapprove of the initiatives and claim that their favorable vote was an error. After implementing severe fiscal consolidation measures that depressed domestic demand, Romania could focus its talks with the IMF on measures aimed at boosting the economy in 2011 and avoiding a third year of economic contraction. The most likely scenario for 2011 is a precautionary stand-by arrangement with the IMF, where Romania will not draw on approved amounts, but retains the option to do so if conditions deteriorate.

Social-Democrat Party proposes a new economic program

Last weekend, the Social Democrat Party presented an economic program that is supposed to put the economy back on track for growth. They favor a progressive personal income tax and propose two alternatives. The first one - which has the greatest chance of being put into practice - has four income brackets with tax rates of 0%, 15%, 25% and 35%. The second has three income brackets with tax rates of 8%, 12% and 16%. The key idea of the new tax system proposed by the Social Democrats is that people earning less than the equivalent of EUR 1,000-1,500 / month will pay lower taxes. Corporate income tax will remain unchanged at 16% to preserve Romania's competitiveness as a local business destination and reinvested earnings will be tax-exempted. The 25% cut in public wages will be completely reversed, the minimum wage will go up, the recalculation process of the special pensions currently received by former employees of the army will be stopped, social contributions will be reduced, energy prices for households will be frozen for one year and the number of public employees will increase in areas such as healthcare. People owning several houses or cars will pay higher property taxes and royalties received by the government from oil and natural gas companies will be hiked. It remains to be seen how the Maastricht criteria and the strict requirements of the IMF in case of a potential future arrangement will match the eye-catching social component of this political program.

MoF sold more at the last 6-month debt tender

Six month tenders have been so far the most successful while investors have reluctant towards longer maturities. MoF sold RON 1.15bn in 6-month T-bills at the last Monday tender at 7% compared to RON 1bn planned. Costs have been on the rise since May as investors' confidence began to rock under pretty tensed political situation. Although Boc Cabinet is expected generally to survive the no confidence vote next week, the coalition remains fragile and pressures for higher yields on the primary market are likely to continue. If the government is to be toppled, investors will ask even for higher yields and the government will be forced to borrow more on shorter term. The ministry aims to issue debt of RON 4.6bn in October, more than double the amount sold in September. So far this year, it has sold almost RON 30bn on the domestic market.

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